September 4, 2016

Investors Are Stuck And Nobody Cares

A report from Reuters UK. “UK housebuilder Berkeley Group Holdings Plc has halted construction at a 20 million-pound luxury housing project in London, it said on Friday. Berkeley Group declined to say why it stopped construction last month at the Barnes Village scheme in southwest London, where homes were expected to sell for up to 5 million pounds, local residents said. It’s not unusual for builders to hold off starting developments until market conditions are optimal. However, it is rare for projects to be stopped mid-build, said Clyde Lewis, analyst at brokerage Peel Hunt, who covers Berkeley. Basements and ground floors had already been built at the Barnes site.”

“‘The London market has got a bit tougher post-Brexit,’ he said, referring to the June referendum on EU membership. ‘The value end of London is still selling OK but more expensive stuff is selling slow,’ he said.”

The Business Standard in India. “Real estate developers continue to pile up inventory at a rapid pace. For the entire industry, unsold stock stood at 1.2 billion sq ft at the end of the April-June 2016 quarter, according to a survey by real estate consultancy Liases Foras. In the June quarter, unsold inventory increased by two per cent on a sequential basis and 17 per cent on a year-on-year (y-o-y) basis. ‘As sales growth continues to lag behind new launches, unsold inventory continues to climb for the industry. In recent times, we have seen a slowdown in new project launches but it will take the industry nearly three years to clear the current inventory, based on the present sale or absorbency rate,’ said Pankaj Kapoor, managing director, Liases Foras.”

The Cambodia Daily. “Condominium sales have plummeted by 50 percent, real estate developments are stalled and the central bank is working to rein in debt, the Finance Ministry reported in its first official biannual review of the economy. ‘There is an urgent need to stabilize credit growth at a sustainable pace to facilitate the soft landing of the country’s real estate market,’ the report says.”

“Beyond its warnings of a credit bubble, the report also notes that sales of condominiums plunged 50 percent in the first six months of the year, while those of gated communities dropped by 30 percent. ‘Real estate developers are adjusting to the excess supply by either postponing some planned real estate construction projects or by outright canceling some of the projects,’ it says.”

The New Zealand. “Auckland property developers fear that a sudden tightening of bank lending may ‘throttle’ new housing projects despite the city’s desperate housing shortage. Several developers have told the Weekend Herald that the country’s big four Australian-owned banks - ANZ, ASB, BNZ and Westpac - have tightened lending to developers because of worries that house prices are peaking and because of Australian regulatory requirements to reduce their exposure to New Zealand borrowers.”

“John Harman, who is developing an apartment block in St Marks Rd, said the banks ‘have kind of lost their appetite for funding developments. The ANZ Bank has even stopped lending. It’s not lending for development of new homes,’ he said. Another apartment developer said: ‘BNZ and ANZ have stopped lending completely. Westpac and ASB are being very selective about who they lend to.’”

From ABC News in Australia. “Brisbane developers are winding back their plans for new apartments but it is unlikely to stop a major fall in prices, a property expert says. Queensland University of Technology property economics expert Professor Chris Eves said there was an increasing glut of apartments in Brisbane and the decline in apartment development plans should have occurred 18 months ago. He predicted some major price drops in investor-style apartments.”

“Professor Eves said rental prices would continue to fall. ‘We’re already seeing it in drops of 10 to 15 per cent in the inner city market … but what we aren’t seeing is the hidden fall in rents that’s with land owners giving rent-free periods to the tenants. So they’re giving the first one, two, three months rent-free. We aren’t seeing that reflected in the face rents being quoted, he said.”

“Brisbane developer Brendan Tutt from Tessa Group said he did not believe the industry was in trouble. He said there had been a maturing of the market and a greater demand for better quality apartments. ‘The day of being able to develop 500, 600-unit towers or even just investment stock for the sake of developing projects is over,’ he said.”

From Arabian Business on Dubai. “It has been described as ’sad,’ ‘troubled’ and ‘fallen’ but for thousands of investors, discussion of the $6bn Dubai Pearl scheme provokes far less sympathetic language. The huge mixed-use project, announced in 2002, has been beset by delays and management changes, and lain dormant since construction work ground to a halt in 2006. A decade later, the project — 13 percent complete, according to its website — looms as a blot on Dubai’s skyline; an exposed concrete core with rusted steel framework; and, until recently, motionless cranes rising from the top of its skeletal structure.”

“An investor: ‘I also visited the Pearl Dubai FZ’s office and met with them, they told me there are so many lawsuits but they do not have the money to pay the investors back or complete the project; they literally told me, you are stuck and no one knows what will happen.’”

“Amir Nosratabadi, founder of a LinkedIn group set up for aggrieved Pearl investors says: ‘The last I heard, which has not been confirmed by anyone, is that the project will be cancelled and land auctioned off. If that happens, I doubt any of the clients would expect to receive much from their money paid. Nobody wants to take responsibility and nobody cares about our investments.’”

“‘I am so frustrated and angry because I put my savings and retirement money into this property but did not receive anything back,’ laments another investor. ‘I tried all the routes but with no avail. I don’t know what I should do next.’”

We’ll Be Talking About This 10 Years From Now

An editorial from the News and Observer in North Carolina. “The question had the best of intentions. A Chapel Hill Town Council member asked, ‘How can the council know if the market for apartments is saturated?’ The short answer is ‘you probably can’t.’ A better answer is ‘you certainly shouldn’t try.’ All of which begs another question, how should a local government evaluate new investment in our community? Such concerns should not be a factor when the Town Council considers applications for new apartment projects. Evaluating supply and demand should be left to the market and the developers risking their money on the investment. There are several reasons for this.”

“Developers have the expertise and real-world experience to best assess the prospects for a project. In the case of rental housing, they collect better data than is available publically. This is their business. They also have more reason to care. After all, it’s their money on the line. That’s not to say they are perfect. This is an inexact science even for the best practitioners. However, in business (as opposed to much government activity) poor decision makers are weeded out, while competency is rewarded.”

“Even if the developer itself fails, a new owner will be found at a price that will make the project viable. Indeed, that is exactly what happened during the recession with Greenbridge (a condo project, but analogous to apartments for this purpose). The original owners lost their investment, but the new owners profitably sold the remaining units at much lower prices.”

“When government intervenes in the process of anticipating needs and efficiently allocating capital to meet them, bad results follow. One only has to look at the economic disorder inflicted when the market was superseded by the Soviet Union’s Gosplan or the Venezuelan Planning Ministry to understand that.”

The Real Deal on New York. “Fort Greene’s sudden logjam of luxury rentals could cut into profits for some of the borough’s top rental developers, ending a price run that’s lasted years. More than a decade after the neighborhood’s rezoning, there are 23 new residential buildings being built (or newly completed) along a 10-block stretch. Together, the buildings will add more than 7,500 apartments, according to the New York Times. Already, landlords are offering concessions to fill their buildings.”

“The amount of apartments is poised to depress prices — or at least put an end to the run-up in prices in recent years, some real estate players think. ‘The market is saturated,’ said Sofia Estevez, executive vice president at TF Cornerstone TRData LogoTINY, which is developing a 714-unit rental at 33 Bond Street.”

The Missoulian on Montana. “A lack of housing options in Missoula is driving up prices here like never before, and that trend has wide implications for the economy. Patrick Barkey, the chief economist at the University of Montana’s Bureau of Business and Economic Research said it’s hard to untangle whether high housing prices create a strong economy or if they are often just a side effect of strong economy. ”

“Barkey said there are two main reasons that ‘lurk in the background’ and aren’t brought up very often. ‘The first is that we have a whole alphabet soup of primarily federal programs to help people buy houses,’ he said. ‘Everything from the Federal Housing Authority loans to Frannie Mae and Freddie Mac. You have to travel to other countries to appreciate how different it is here.’”

“Because lots of people are able to qualify for loans, they are able to buy houses and thus the inventory decreases. ‘When you have a restricted supply like we do in Missoula, it pushes up prices,’ he said. ‘People can get 30-year loans and it tends to show up in price growth.’”

“Barkey said he’s not the only person who has pointed out that housing policy in many cities has failed. ‘Basically, what affordable housing policies in communities across the country do is try to subsidize house purchases for people who can’t afford market prices,’ he said. ‘At least in my opinion, those policies are doomed to failure. Market prices are the problem.’”

“‘Something tells me we’ll be talking about this 10 years from now,’ said Barkey. He said that because the economies in some of the least affordable places in the nation – San Francisco and New York, for example – are doing extremely well, people are often tempted to conclude that higher housing prices equal a better economy.”

The Naples Daily News in Florida. “After a long recessionary dry spell, a flood of new homes inundated the Southwest Florida housing market over the past six years. Now the question becomes: Is this flood about to recede? ‘The new home market in Lee and Collier County has softened along with the rest of the residential market,’ said Mike Timmerman, a Naples-based economic adviser to builders. ‘The supply has increased, and demand has slowed, which is putting pressure on pricing.’”

“Timmerman said he considers the temperature of the current housing market cool and adds ‘the sales pace of new residential communities has slowed over the past 18 months, especially those communities which have similar product and pricing strategies.’”

“And that’s dried up traffic in a way that’s got some in the industry like Bill Fox, division construction manager for Southwest Florida for Frontdoor Communities in Naples, a bit worried. Over the summer, traffic at his communities, which typically run in the $700,000 to $1 million range, has dropped to about 10 visitors a week from about 30 or 40 a week, he said. But the biggest reason for the market cool down, industry experts agree, is oversupply.”

“‘Builders got too exuberant and built too many houses,’ said David Cobb, southern regional director of the new home research group MetroStudy, at a meeting of the Collier Building Industry Association in Naples. Wrongly expecting a significant increase in demand that didn’t materialize, ‘builders got into a supply trap,’ he said, leaving them with too much inventory starting late last year — particularly in Collier County.”

“Cobb expects builders will eliminate excess supply soon by cutting back on building and offering buyers more deals and incentives. But even with incentives, it’s getting harder to get buyers to commit to a new home, said Patty Campbell, division president of GL Homes in Naples. That’s because the existing home market is becoming oversupplied, too. In July, overall existing home inventory rose 36 percent, to 4,801 units from 3,518 units a year earlier, while both closed and pending sales dropped by double-digits, the Naples Area Board of Realtors reported.”

“So while buyers would jump on a new home when the market was hot and supply tight, confident that they’d be able to sell their existing home quickly, now they’re not as sure that will happen. ‘They want to sell their old house before they buy a new one,’ Campbell said.”

“But for now buyers who are ready to commit are benefiting from the excess new home supply, said Rick Fioretti, president of NABOR. ‘In the early part of year you couldn’t get a builder to give you a dollar,’ he said. ‘Now there are incentives, and now they immediately come out to us for support.’ Buyers are typically nabbing around $10,000 to $15,000 in incentives that offset some of the price increases builders had been making when the market was hotter, he said.”

“And some, like Naples medical device distributor Joe Massaro, have done even better than that. Massaro, 54, had been looking for a new home for more than a year when he came across a two-bedroom home he liked at Greyhawk Golf Club of the Everglades. To entice him to buy the $455,000 home, the builder, Pulte Homes, offered him $12,000 off his mortgage costs, an upgrade to the Craftsman-style elevation he wanted, and about $5,000 off his lot costs, he said.”

“Massaro was thrilled. ‘I got an outstanding deal,’ he said. But he’s a little sorry he didn’t wait a little longer. ‘Now I hear they’re giving away free pools,’ he said.”